Dear Reader, we make this and other articles available for free online to serve those unable to afford or access the print edition of Monthly Review. If you read the magazine online and can afford a print subscription, we hope you will consider purchasing one. Please visit the MR store for subscription options. Thank you very much. —Eds.

What can we say about the assertion that there is a “New Economy”? That depends on what we mean by this term. It is nonsense to claim, and few do any more, that the business cycle has been eliminated or that the contradictions of capitalism have been resolved. In 2000 we witnessed a massacre of technology and Internet stocks ending what many considered the country’s biggest financial mania of the past hundred years. The NASDAQ lost over half of its value, a paper loss of 3.33 trillion dollars, the equivalent of a third of the houses in the United States sliding into the ocean, as one Wall Street wag tells us. While only a few months ago, all we heard about was the magic of the market and that crises are the result of bad government policies, whether “crony” capitalism or simply failure to make information available to markets in a full and timely fashion, and that the new information technology now makes markets even more efficient; all of this talk is now shown to be the usual exaggeration we find in the up stage of most long expansions. As in the past it disappears as the economy weakens. Indeed as inventories pile up the nature of capitalism becomes clear to even the financial press and the politicians.

As to the permanently high plateau we were said to be on thanks to the great increases in productivity brought about by the New Economy, it now appears to many New Economy enthusiasts that this has been a cyclical phenomenon. As the Financial Times writes editorially, a New Economy “driven by a productivity miracle now seems even more far-fetched.”1 By early 2001, as companies cut their investment spending substantially, capital budgets for equipment and software declined, mocking the claims that informational technology would be relatively immune to the business cycle.

The notion that better information alone guarantees that markets will allocate resources efficiently has always been a major misrepresentation. The idea that policy makers and private decision makers now have “reliable information about the future thanks to the IT revolution” has proven equally chimerical. In Mexico in 1994, for example, the data was available well before the peso crisis erupted, as it was in Thailand and elsewhere before the East Asian financial crisis broke in 1996. In every expansion, as Keynes and Marx before him explained, there is the tendency for investors to be overconfident and shrug off the warning signs. The information can be available and transparent, but the interpretation of events and data during the expansion leads to piling speculation upon speculation.

Until the high-tech bubble burst, there was a widespread belief that this business cycle was different. This was usually supported not only by the length of the expansion, but also by the lack of inflationary pressure in the face of prolonged growth, and in the second half of the 1990s by the rapid increases in productivity. But it is now evident that the talk about the end of the business cycle as a result of a “New Economy” was as misguided as similar talk, which always sprouts toward the end of long periods of expansion, has always been. There has been talk of a “New Economy” toward the end of every long boom, when it is said that the business cycle is passé and that there are new rules. In the 1920s, amid such euphoria, many working people were seduced by the promise of capital gains to be made in stock speculation in such “high tech” New Economy firms as General Motors and RCA; they began to buy as the party was about to end. Capitalism grows through alternating periods of expansion and crisis; that remains its nature. Does this mean that nothing has changed, that there is no “New Economy?” I do not think this would be right, either.

The truth is that the “information revolution” does not change the basic nature of the way capitalism works, even if it enhances productive efficiencies just as the telegraph and transoceanic cable did in an earlier era of capitalist development. More important is the basic continuity of the system. Technology in a capitalist economy is embedded in a set of social relations. These include the patterns of ownership and the speculative growth of fictitious capital that results from the drive—on the part of those who make a living buying and selling claims to future surplus extraction—to overvalue assets. In this fundamental reality of the system there is surely no New Economy. Those who said, “but this time it is different,” are quieter these days. At the start of 2001 the Goldman Sachs Internet Stock Index was down three-quarters from its peak, leading the Financial Times to editorialize that the words “New Economy” “will give investors nightmares.” But we should not move from acceptance of the New Economy hype to the pessimism that it was all just a speculative bubble, a high-tech tulip mania.

The New Economy thesis does raise two significant areas for investigation. The first is in what sense can it be said there is in fact a “New” economy? This involves the thesis that we have entered a third industrial revolution. Perhaps the term “industrial” is outmoded since it is being suggested that a “knowledge” or information economy has emerged, in which we have increasing returns to scale. The distinction is not simply the stress on information as opposed to physical production; rather it is the idea that since knowledge can be used by others without additional cost, the more output the knowledge economy produces the lower the cost per unit of its production. Instead of diminishing returns we have increasing returns. This, it is suggested, promises a more rapid rate of growth in the future. Some theorists carry this line of thinking quite far, claiming that the old rules and relationships no longer apply. However, this thesis has hit some speed bumps as the speculative bubble that accompanied these bold assertions collapsed. At a more fundamental level, many of the innovations of the past created increasing returns to scale and network effects; the idea that the more people use a technology the more they will want to use it, like the Internet or a video format, while accurate enough, forgets that the telephone and other innovations had this same property.

The New Economy thesis also raises questions about its effects on the masses in their roles as workers, consumers, and citizens. Has the New Economy empowered workers by leveling the hierarchical structures of the corporation and by increasing the value of the knowledge workers possess relative to that of “mere” capital? Or has the New Economy led to a greater concentration and centralization of power made possible by the new technology available to management? With the new technology comes a class recomposition, but what exactly is its nature and what are its consequences likely to be? Despite the optimism on these matters in some circles the increase in job insecurity, the stagnation of real earnings, the loss of health care coverage and other benefits, and the increased political power of corporate capital to claim ownership of intellectual property would seem to argue for the dismissal of such Panglossian interpretations.

This discussion too has become more subdued in recent months as a result of the fallout from the major market “corrections” we have experienced. These are nonetheless important questions that retain long-term salience. Here we will look at the question of what kind of newness we should be talking about, and then we will say some things about the shape the U.S. and the global economy are taking in this period after the bubble has burst.

I do not know how to compare the impact of Crompton’s mule, which revolutionized the spinning of cotton, to that of the personal computer, or Watt’s steam engine to the Internet. Can we, should we, attribute the current restructuring of the economy to the lower costs of data processing in the same way we have learned to see the declining cost of output in the textile industry as the basis of England’s fortunes? As the cost of steam power fell dramatically it sped industrialization more broadly in the eighteenth century. I think there is already enough evidence of similar cost-reducing capacities in information technology. These new processes are somewhat analogous to those of the second industrial revolution a century ago when breakthroughs in chemical and mechanical industries, and the impact of electricity and the electric motor on industrial output, vastly changed the nature of production and social life. The new sources of energy, electricity and petroleum, made possible the radio, television, automobiles, and trucks. Among other society-reshaping innovations we might point to the telephone and penicillin as changing the possibilities for people and capital. Is the growth of information technology—by increasing the speed and lowering the cost of data collection, storage, retrieval, processing, and dissemination through networks that include entertainment and business-to-business channels—changing our world dramatically? I think so, but perhaps significantly less dramatically than was the case for the first two industrial revolutions. One prominent productivity expert suggests, for example, that it is not clear that the computer has been as important to economic growth as the air conditioner was.

Capitalism does innovate and major new technologies do feed a cumulative growth cycle as they spread through the economy, but this is not anything new. As David Landes wrote of the first industrial revolution, it “initiated a cumulative, self-sustaining advance in technology whose repercussions would be felt in all aspects of economic life.”2 The same may be true of the developments visible in the present period even if their extent may not yet justify calling this a third industrial revolution. They too are embodied in capital and work processes, change the balance among class fractions, and reconstitute classes and forms of industrial and social organization. There has not, however, been the liberatory end to the “inexorable demands of the clock,” as some of its enthusiasts have suggested. The PC, fax, and cell phone, rather than providing more free time have enmeshed many in a world in which it is far harder to find private, family, or non-work-related communal space. There is exposure to greater speedup and intensified control over the labor process, and the development of an enlarged, more flexible workforce on a global scale has increased inequality everywhere.

Companies in the 1990s learned more brazenly to fire long-term employees, outsourcing and subcontracting their jobs, replacing their traditional workforces with contingent and contract workers, and shifting core employment to a smaller New Economy cohort. The power of the employer class to harness the technologies of the first and second industrial revolutions led to decades of harsh working conditions, intolerable hours, intensified work pace, and near starvation wages, until the working class gained both an understanding of what had happened to it and the self-organization to begin successfully resisting the depredations of capital. In each case a smaller group of workers and a new middle class benefited while public policy supported the intense exploitation of the majority who were ground down by the reorganization of work. But in both previous industrial revolutions a class-conscious working class emerged. This third wave is different in that it is in the context of a greater internationalization of labor. The next wave of popular resistance is therefore likely to be more internationalist as well.

At the same time I think it is also true that new technologies do change the way we live and the manner in which goods and services are produced and distributed. It is unlikely that very many of the new start-up firms will have staying power. But some of them will revolutionize the means of production and there is reason to accept that this period is one in which a wave of innovative synergies brought to us by the computer, and microprocessors more broadly, the joining of laser and fiber optics, satellites and a host of other critical technologies will in retrospect make the present period appear unique in much the same manner as the earlier industrial revolutions appear to us today. Whether one wants to stress the disjuncture of such developments, or their essential continuity, seems secondary.

Why Marxists should be surprised by the extent of such developments and their widespread impacts I do not know. “The bourgeoisie cannot exist without constantly revolutionizing the instruments of production, and without them the whole relations of society,” as Marx and Engels wrote in The Communist Manifesto. Globalization, which they presciently described in that document among others, continues the search for lower-wage workers through geographic expansion that has long been central to the operation of the capitalist system. Landes writes of early industrialism, “…rural manufacturers expanded easily by opening new areas—moving from the environs of the manufacturing towns into nearby valleys, invading less accessible mountain regions, spreading like a liquid seeking its level, in this case the lowest possible wage level. It was in this way that the woolen industry filled the dales of Wiltshire and Somerset and came to thrive all along the Welsh marshes by the end of the sixteenth century.”3

Likewise, the Internet will surely continue to revolutionize the economy, offering unexpected opportunities as it dramatically lowers the costs of doing conventional business tasks. Product development time is cut by computer-aided prototype design and testing. Warehousing control and just-in-time delivery cut down the scale and cost of inventory management. Truckers, while on the road, can check in real time for business on the route they are traveling. Construction subcontractors can share blueprint changes instantly and schedule site activities. Medical tests can be processed faster and results delivered, along with diagnoses, to remote sites. Goldman Sachs estimates initial business-to-business savings in the 10 to 25 percent range for industries such as aerospace machining, forest products, media and advertising, auto and steel.4

Just as a hundred years ago the giant industrial corporations that were to dominate the U.S. economy for most of the coming century, the U.S. Steels and the Standard Oils, were formed in breathtaking mergers, so today we may be seeing the basis of the twenty-first century economy being created. Many of the new behemoths like Cisco, Lucent, and Nortel, are hardly household names, and even those that have become familiar, like Microsoft and Intel, are new to the landscape. Of the twenty-five largest American corporations in 1960 only four are still on the list at the start of the new millennium. Similar changes are taking place globally as old corporations fade and their space is taken by new ones prominent in the cyber-economy: Nokia in Finland, Ericsson in Sweden, and others. A prime example is the U.K. firm Vodafone, not two decades old when it swallowed Mannesmann, which had existed in various forms for more than a century, in the largest merger ever and the first hostile merger in Germany by a foreign firm. The struggle to dominate the terrain of the New Economy is accelerating.

The cost of being part of the New Economy declines as its benefits increase. The price of a new computer has fallen at an average rate of almost 20 percent a year since the early 1950s. Spending on information technology was less than 7 percent of total equipment investment in 1954, but is 50 percent of total equipment investment today. Meanwhile the structures of twenty-first-century industries are continually transformed through convergence. There is interpenetration of content and delivery, fixed and mobile telephony, and voice and data transmission. Telephone, radio, and television can be delivered together and in a number of competing ways. But these innovations have lengthened the working day as people can be reached twenty-four hours a day, seven days a week. These innovations have enhanced management’s ability to monitor their employees’ work and communications. Sophisticated software scans employee e-mail for words such as “union,” while the number of orders processed, words typed, and requests fulfilled are computed automatically and arrayed by employee for supervisors to compare. Personal users of the Internet are tracked and their inner secrets pried out by compiling the sites they visit and the purchases they make; their consumer profile is then sold to advertisers to customize the sales effort.

Just as in earlier waves of capitalist expansion, maximization of private profit collides with social needs, and technologies are developed in ways that serve capital at the expense of working people. As David Coates has written: “Globalization in its modern form is a process based less on the proliferation of computers than on the proliferation of proletarians. The growth in the size of the world’s proletariat and the change in its geographical centers of gravity—and not simply the enhanced mobility of capital—are among the defining features of the current phase of global capitalism.”4 In mainstream discourse this is usually ignored, or denied, while the intensified exploitation of labor is celebrated as a factor contributing to the marvelous performance of the New Economy.

High tech, of course, does not supply high-wage employment to most of its workers. Below the dot-com former zillionaires (many of whom are unemployed while others remain multimillionaires), and the stock-option staff (who may wish they had opted for health benefits, job security, and pensions instead), are the subcontract fulfillers who never had much of anything and vastly outnumber the higher profile masters of the high-tech universe. Silicon Valley’s electronics industry remains part of the global assembly line. The underside of the valley is inhabited by Mexicans and Cambodians living in crowded conditions at exorbitant rents, and who are paid four or five dollars an hour for work they are forced to take home when delivery deadlines have to be met. Forty percent of the homeless in Santa Clara County have jobs; they just can’t afford housing on what they make, nor can teachers, firefighters, or police. Jobs are available in the valley, indeed more than a third of local “high-tech” jobs go begging according to a survey of employers. That’s because many of these are in sub-contract manufacturing and the outsourcing of service jobs that keep costs down for the dot-coms, some of whom are the most profitable companies in the world. The majority of the valley’s residents are nonwhite, largely Mexican immigrants. Forty-two percent of Santa Clara County’s work force are part-time, temps, contract workers, or self-employed, compared to half of that proportion in the 1980s. The recovery and the prosperity have not been shared. Generally in this country the low unemployment rate is hardly an indication of well-being. Real wages for most workers have been stagnant and for the bottom 40 percent or so have fallen substantially.

Despite its importance for the stock market the New Economy is not producing a general prosperity; frequently it is an enclave economy. Indeed, it is part of the growing inequality at home and in “Belinda.” Belinda is that paradigmatic country with a dual economy. While it has a high-skilled capital-intensive sector comparable to Belgium, most of its citizens live under conditions comparable to India. Not only is India itself a Belinda, so are South Africa, Brazil, and many other countries with gross inequalities. Such a pattern of combined and uneven development is nothing new of course.

It would be well to remember that 99 percent of the billion or so workers who will join the labor force over the next quarter century will live in what are today’s low- and middle-income countries. According to the World Bank, “there is no worldwide trend toward convergence between the rich and the poor workers. Indeed,” their annual report has noted, “there are risks that workers in poorer countries will fall further behind.”5 This means that not only will there continue to be immigration, documented and undocumented, but that a vast labor reserve exists, and a vastly larger one is coming into existence. This poses a threat to the living standards of the higher-skilled as well as the lower-skilled workers in the core. Relatively low-wage skilled workers exist in increasing abundance in the periphery, ranging from computer programmers in Bangalore, India, to the highly skilled technicians fashioning replacement teeth and crowns in Merida, Mexico, for the U.S. market.

The New Economy allows companies to dump noncompetitive or redundant workers while adding new ones at home and abroad. In 1999, at what may prove to be the peak of the longest recovery in the nation’s history, reported layoffs in the U.S. reached 675,000 according to Challenger, Gray & Christmas, the personnel-consulting firm that monitors reported layoff plans. The comparable figure was only 111,000 in 1989 during a period of recession. The Bureau of Labor Statistics, whose figures include layoffs that aren’t publicly announced, said the total exceeded one and a half million lost jobs in 1999. The ideological climate has changed so much that companies feel they suffer no adverse consequences from disposing of some workers while hiring others they prefer.

The connections between a rising high-tech segment of the stock market, widespread stagnation elsewhere, and more or less constant and falling real wages for the majority, need to be made clearly so that the celebration of the New Economy by politicians and the financial press can be better understood. Beneath the technological progress are the same old instabilities and social relations of capitalism.

At the start of 2001 Stephen Roach, chief economist at Morgan Stanley Dean Witter, called what we are experiencing “the recession we needed.” There had been indiscriminate buying by firms of unnecessary computers and software upgrades, savings had plunged, the U.S. had borrowed too much from abroad, and a recession would take care of it all.6 But, if spending on computers and technology generally had been overdone, it was also responsible for the increases in measured productivity and the general optimism and prosperity of the market, however narrowly shared. This optimism was based on borrowed money and spending that reflected inflated paper wealth from stock holdings. While we may need a correction the downside is not easy to predict and many are worried.

With American success in the 1990s came greater dependence on foreign money, and increased consumer and corporate debt. Foreigners had more than six trillion dollars invested in the U.S. (Americans have about 2.5 trillion dollars invested abroad) at the beginning of the new millennium. The current accounts deficit, the net flow of goods and services including income earned on foreign investments, is currently above 4 percent of GDP, a level that would result in capital flight in many other countries, and as the economy slows it is widely understood that foreign investors cannot be counted on to finance the record-high $400 billion current account deficit. Capital flight can happen here. Maurice Obstfelt of the University of California at Berkeley and Harvard’s Kenneth Rogoff suggest the dollar could fall by as much as the Mexican peso did in 1995. Princeton economist Alan Krueger worries that this could be a real problem since there is no international monetary authority that is large enough to bail out the United States.

If spending on computers and technology has been responsible for the higher productivity and prosperity, then overinvestment will be followed by a period of slow growth. As a result productivity growth will slow and unemployment will increase. As the dollar falls import prices will rise, and inflation generally will accelerate, interest rates will rise, further discouraging spending, and we may see stagflation once again. Michael Mandel, economics editor at Business Week, has written a very pessimistic book, The Coming Internet Depression, which paints a bleak future for the New Economy. Whether such fears materialize remains of course to be seen.

There are other areas for concern. Part of the New Economy was the financial innovation of the 1990s that produced a host of new instruments that were eagerly embraced, but which have yet to stand the test of a downturn. While the ninety-plus trillion dollars in notional value of derivative contracts exaggerates their importance, the existence of such contracts, and the likelihood that in a real downturn many of them would not be honored, suggests that the meltdown threatened by the near demise of Long Term Capital Management, the highly leveraged firm run by Nobel prize-winning financial economists and rescued through Federal Reserve intervention in 1998, may prefigure far worse. As commercial banks become less important as a source of funding relative to capital markets, it will be harder for regulators to arrange workouts when developing countries threaten the next round of defaults. Indeed, the banks themselves have become major bettors, getting a larger and larger share of their profits from high-risk loans. For Chase, venture capital earnings were 22 percent of their 1999 net income, a remarkable figure suggesting the risks involved for major financial institutions, and for the rest of us who live in their shadow.

The New Economy, which in the 1990s was to have signaled a leveling of corporate structures and an end to the power of existing firms (challenged by brash upstarts who threatened to come from nowhere and “eat their lunch”), looks somewhat different now. Mergers and acquisitions form a record breaking wave of concentration and centralization akin to and surpassing those at the turn of the last century. We are now seeing cross-border mergers and strategic alliances representing fantastic increases in economic and political power. The New Economy is very much a reality, but the reality is that of runaway growth in the power of capital at the transnational level. This is the reality of the New Economy that calls out for attention and a response.

While Washington argues over how much to cut taxes for the corporate rich based on bogus ten-year forecasts, the real needs of working people for health care, education, and social welfare spending go unmet. It is after all the same old economic system.